That trying to beat an arbitrary index is really just a marketing contest. Just because you lose 19% when the index loses 20% is no miracle. Look at it’s 5 year number…-9%. Wow. That’s amazing. I’m underwhelmed. Over 5 years, he has underperformed the S&P by 9.4% per year. And he’s in the bottom of the barrel in his category.

That trying to beat an arbitrary index is really just a marketing contest. Just because you lose 19% when the index loses 20% is no miracle. Look at it’s 5 year number…-9%. Wow. That’s amazing. I’m underwhelmed. Over 5 years, he has underperformed the S&P by 9.4% per year. And he’s in the bottom of the barrel in his category.

I'm coming around to the index/low expenses point of view. I've always thought that a smart guy could beat the market, which I figure is the sum total of all the smart, dumb and mediocre guys, but in this case Gross hasn't done that over time. I guess he could be back on top next year, but his Bear Stearns and his AIG ain't coming back.

See, I prefer the core/satellite approach, and picking the best managers in each area (not necessarily the best returns every year, but the most consistent). In my opinion, beating an arbitrary index like the S&P is no feat. I would rather outperform the index over long periods with less volatility. But I am not concerned if one year the S&P does 32% and I do 25%, as long as when the S&P drops 15%, I do a positive 5%. But I don’t really compare to indexes too much. I look at total return and volatility. I’d rather get a (relatively) steady 7% return year after year, than get 40% one year, followed by -30% the next.

Most clients don't realize it, but they are much happier with a 7% return and a Std Dev of 7, than a 9% return with a Std Dev of 19. Most won't be able to hang in there when the "deviation" is on the downside. They either bail, fire you, or just go crazy with anxiety.
That's where active management has advantages (IMO).

I'm coming around to the index/low expenses point of view. I've always thought that a smart guy could beat the market, which I figure is the sum total of all the smart, dumb and mediocre guys, but in this case Gross hasn't done that over time. I guess he could be back on top next year, but his Bear Stearns and his AIG ain't coming back.
[/quote]
Wrong Bill.

Most clients don't realize it, but they are much happier with a 7% return and a Std Dev of 7, than a 9% return with a Std Dev of 19. Most won't be able to hang in there when the "deviation" is on the downside. They either bail, fire you, or just go crazy with anxiety.
That's where active management has advantages (IMO).[/quote]
This is quite possibly one of the smartest and best things you've ever said B24!
It seems obvious to us, but our simple-minded and irrational clients would do very well to understand this concept.
There is way too much risk taken by people that just don't need that risk. I openly admit that some of my accounts had much more risk in this environment than I ever thought they would, but we learn and move on.

I agree with the majority on this board. I think picking a fund because it beats an index every year for X number of years is completely useless and arbitrary in the realm of helping clients.

There are a number of funds out there that have not beat the market every year, but provide safety in down years and growth in up years( my favorite funds never reach the highs or lows of the indexes).
Then there are some funds that shoot for the moon and actually land there(given a certain time period) but I am finding those funds have no more than 50 holdings.

I’ve posted on this topic before. It’s very easy to put together a potfolio for a client that shows a list of funds that have all done well in their respective asset classes. In fact, all you’re doing is looking at past results of money managers who have made bets on certain things. The problem with this is, who know how these guys are going to do going forward???

Examples - how did these funds look a couple of years ago and how do they look now?
Kinetics Paradigm
Dodge and Cox Stock
Legg Mason Value Trust
John Hancock Classic Value
and my all time favorite...
Oppenheimer Rochester National Muni
91% of long term returns come from asset allocation. With that said, if the S&P 500 does 10% over the next 10 years, and you are invested in an index fund or ETF that mirrors the S&P, what are the chances you'll earn that 10%? The chances are 100%. Now, what are the chances if you are in a large cap mutual fund that you will earn that same rate of return net of fees and taxes? I don't know.
Build globally diversified asset allocation portfolios including alternative asset classes with the correct blend for your clients. Invest in the asset classes through a low cost efficient index and reallocate when necessary. Quite simple.
Just stop chasing the hot fund.
My opinion.

[quote=peacock]I’ve posted on this topic before. It’s very easy to put together a potfolio for a client that shows a list of funds that have all done well in their respective asset classes. In fact, all you’re doing is looking at past results of money managers who have made bets on certain things. The problem with this is, who know how these guys are going to do going forward???

Examples - how did these funds look a couple of years ago and how do they look now?
Kinetics Paradigm
Dodge and Cox Stock
Legg Mason Value Trust
John Hancock Classic Value
and my all time favorite...
Oppenheimer Rochester National Muni
91% of long term returns come from asset allocation. With that said, if the S&P 500 does 10% over the next 10 years, and you are invested in an index fund or ETF that mirrors the S&P, what are the chances you'll earn that 10%? The chances are 100%. Now, what are the chances if you are in a large cap mutual fund that you will earn that same rate of return net of fees and taxes? I don't know.
Build globally diversified asset allocation portfolios including alternative asset classes with the correct blend for your clients. Invest in the asset classes through a low cost efficient index and reallocate when necessary. Quite simple.
Just stop chasing the hot fund.
My opinion.
[/quote]
I think this is wrong. If the S&P does 10%, the chances of you doing 10% is actually 0%.
You'd get 10% minus the fees.